Gennaro Cuofano's Blog, page 237

Glance At The Business Models Used By European Startups

According to the European Startup Monitor (2016), the most used business models in the European ecosystem are IT/software development, followed by SaaS and Industrial technology/production/hardware. The greatest challenge is related to sales and customer acquisition. 

Introduction

Finding a common pattern within the European Startup ecosystem isn’t simple. Historically European countries have had diverse profiles, cultures, and economies. This is also reflected in the startup ecosystem. Having that in mind, we’ll look at the European Startup ecosystem by zooming within each country to gain a richer understanding.

Let’s start from a basic question: What are the key elements and ingredients that make European startups successful?

According to the European Startup Monitor (ESM), in 2016  over fifty percent of startups founders saw their products as an international market innovation. Over forty percent of founders saw technology improvement as another crucial differentiator. Twenty-eight percent thought of business model innovation as a key element. Lastly, over twenty-eight percent saw their processes as another critical ingredient.

In short, among the key elements for a European Startup success, the four of them that mattered the most can be broken down into:

Product
Business model
Technology
And processes

Why it all goes back to business model innovation

A business model is made of many moving parts. More precisely, a proper distribution combined with a product that the market wants (product/market fit) and a technology that makes the users’ experience seamless is part of a process called business model innovation.

If you look at the companies that today dominate the entrepreneurial landscape (Facebook, Amazon, Apple, Netflix, and Google) those all came up with innovative business models. What does business model innovation entail?

Business model innovation entails new strategies and new ways of doing things. However, innovative business models also result from a combination of existing patterns. For instance, back in the 2000s, Google launched its advertising machine, called AdWords (now Google Ads). Google got inspiration from an existing search engine, called Overture (formerly GoTo). Overture had for the first time introduced an auction system based on a cost-per-click mechanism. Google took that system, improved on it, by adding a quality score system, which became Google’s cash cow for years to come.

This is one of the many examples of how business model innovation springs up from existing patterns.

A glance at the European startup ecosystem

Europe is comprised of countries with high diversity, in terms of language, economy, and cultural barriers. For that matter, the European Ecosystem is pretty fragmented. Let’s dive into some key facts and statistics.

Based on the European Startup Monitor analysis for 2016 (which used data from 2,515 startups from all 28 European member states and other important countries in the European startup ecosystem – like Israel) three out of four startups were independently founded. While around ten percent was a spin-off from a university or university product. And the remaining startups were a spin-off from existing companies or other research projects.

Over seven percent of these startups were no older than four years. The overall age of startups part of the ESM study was an average of two point four years. With a minimum life of one point three years in Greece and three-point four in Finland.

Of these startups, twenty-two percent were still in a seed stage. Therefore they had not generated any revenue. Over fifty percent were in a startup stage. And over twenty-three percent in a growth stage. Only above three percent of these startups are in the later stage or in standby.

What business models were they using for their operations?

Prevailing business models in Europe

According to the ESM study, the prevailing business models could be divided into ten primary categories:

IT/software development
Software as a Service (SaaS)
Industrial technology/production/hardware
Consumer mobile/web application
E-commerce
Bio-, nano-, and medical technology
Finance/finance technology (FinTech)
Online marketplace
Education
Consulting company/agency

It is interesting to notice that each European Country used a primary business model. For instance, Austria, Belgium, Finland, Ireland, and Spain primarily run on a SaaS business model. Other countries like France, Germany, and Italy run primarily IT and software development business models.

More than fifty percent of those companies offered products or services that addressed B2B users. And over sixty-seven percent generated revenues through B2B customers. Countries like the United Kingdom, Switzerland, and Spain focused on B2C users. While Finland, Belgium, and Portugal focussed on B2B users.

If we look at the four key elements for a startup success (product, business model, technology or product innovation) countries like Finland and Belgium led in terms of product innovation. Ireland and Finland led to business model innovation. Hungary and Ireland led in technology innovation and the UK, Ireland and Finland led in process innovation.

Key takeaway and conclusions

Business model innovation in Europe proved so far an important ingredient to startups ability to create a long-lasting advantage and to compete in a globalized marketplace. In some cases, business model innovation springs up from creating new business methods. However, business model innovation also springs up from taking existing patterns and improving on them to come up with a unique model. Among the most popular business models in Europe, SaaS, consumer applications and marketplaces played a key role so far.

Infographic on European Statups

As reported by the European Startup Monitor:

To provide an overview of the industries in which the startups are operating, the respondents were asked to match their startup to one of eighteen industry categories. The results indicate the relevance of the digital economy for innovative European startups; the digital economy accounts for five of the seven major categories. Most startups stated that their venture belongs to the IT/software development sector (15.0%) followed by software as a service (12.2%) and industrial technology/production/ hardware (8.3%) . The most frequent categories on the level of individual countries are IT/ software development (8 countries) and software as a service (8 countries).

[image error]According to the European Startup Monitor (2016), the most used business models in the European ecosystem are IT/software development, followed by SaaS and Industrial technology/production/hardware. The greatest challenge is related to sales and customer acquisition.




Most Popular Business Models of European Startups (2016)



IT/software development
15%


Software as a Service (SaaS)
12.2%


Industrial technology/production/hardware
8.3%


Consumer mobile/web application
6.8%


E-commerce
6.6%


Bio-, nano-, and medical technology
5.8%


Finance/finance technology (FinTech)
5.2%


Online marketplace
4.9%


Education
4.8%


Consulting company/agency
4.6%


Online service portal
4.2%


Green technology
4.0%


Food
3.4%


Media and creative industries
3.3%


Games
1.3%


Offline services
1.3%


Stationary wholesale and retail
0.6%


Other
7.9%

 

Prevailing business model by country



Austria
SaaS


Belgium: SaaS
SaaS


Cyprus
Industrial technology/production/hardware, Consumer mobile/web application


Finland: SaaS
SaaS


France
Consumer mobile/web application; IT/software development


Germany
IT/software development


Greece
Industrial technology/production/hardware


Hungary
IT/software development


Ireland
SaaS


Israel
IT/software development; SaaS


Italy
IT/software development


Netherlands
Other categories


Poland
IT/software development; SaaS


Portugal
IT/software development


Slovenia
IT/software development


Spain
SaaS


Switzerland
Finance technology (FinTech)


United Kingdom
e-commerce


Other EU countries
SaaS

 

Greatest challenges for European Startups



Other
0.8 %


Team development
3.1 %


Acquisition of staff
5.6 %


Processes/internal organization
5.7 %


Profitability
5.7 %


Internationalization
6.3 %


Cashflow/liquidity
7.6 %


Raising of capital
12.1 %


Growth
16.6 %


Product development
17.1 %


Sales/customer acquisition
 19.5 %

Sales and customer acquisition is the biggest challenge European startups have. As pointed out many times over on this blog, sales and distributions are among the most challenging part for any startup. At the same time, it is also the reason why many startups fail and many others do not succeed.

Reference for the data: European Startup Monitor

Resources for your business: 

Business Strategy: Definition, Examples, And Case Studies
What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
What Is a Value Proposition? Value Proposition Canvas Explained
What Is Business Development? The Complete Guide To Business Development

Handpicked case studies: 

The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Does Twitter Make Money? Twitter Business Model In A Nutshell
How Amazon Makes Money: Amazon Business Model in a Nutshell

How Does Netflix Make Money? Netflix Business Model Explained

The post Glance At The Business Models Used By European Startups appeared first on FourWeekMBA.

HBS Not-For-Profit Self-Sustaining Business Model

Harvard Business School follows a non-for profit business model with a self-sustaining cycle, where thanks mostly to the resources the School and all the businesses around it generate enough revenues to cover up all the expenses and finance its future activities.

For instance, in 2017, HBS generate $69 million in cash from operations, from its $800 million in revenues. With over 14.8 million case studies sold, HBS publishing made $221 million in revenues. And with over 10,351 applications in 2017 to its MBA programs, of which 1,879 accepted and a tuition of $ 63,675, made $191 million in 2017.


A glance at the self-sustaining model

As reported on the HBS annual report for 2017:

The model begins with our commitment to internally funded faculty research. Free from the constraints that can come with grants and other outside funding, HBS research budgets allow the School’s faculty to stay close to practice—to travel wherever their work takes them and to interact in the field with leaders and managers who are confronting the most interesting business challenges and opportunities.

HBS disseminates the resulting intellectual capital to educate leaders and influence the practice of management on a global scale, both through its educational programs and through Harvard Business Publishing (HBP).

In general, for a not-for-profit organization, the prevailing model is that of grants and outside funding. While HBS does still rely on a good chunk of its total revenues on endowments and gifts (27% of its revenues in 2017). It has also been investing to create a self-sustaining infrastructure.

For instance, Harvard Business Publishing (HBP) has generated $221 million in revenues, as of 2017 proved to be the most reliable revenue contributor with 28% of its revenues.

Profits as a self-sustaining funding model

Completing the self-sustaining cycle, operating surpluses at Executive Education and HBP supplement revenues from MBA tuition and alumni gifts as the primary source of funding for faculty research. In short, the success of the HBS economic model starts with the value of the faculty’s scholarship and the School’s ability to translate this value into income for operations, which is then reinvested in future intellectual capital creation.

In this self-sustaining mechanism, Harvard uses the profits generated by its organization, to invest it back on the infrastructure that keeps it going.

How does HBS make money?

[image error]

Source: HBS Annual Report 2017

HBS funds its operations with cash that comes from a few primary sources:

MBA tuition and fees
Harvard Business Publishing (HBP)
Executive Education
Philanthropic revenues (including gifts and endowment)

Those sources make up for most of HBS income.

MBA programs carry a negative profitability

Tuition and fee revenues do not fully recover MBA Program operating expenses at HBS, much less the School’s long-term investments in academic innovation. The shortfall is offset primarily with income from gifts given by alumni and friends of the School whose generosity enriches the HBS educational experience for future generations of students.

It is interesting to notice that the overall cost to run an MBA program it’s not covered by the tuition fees. Instead, apparently as of 2017, HBS is offsetting those losses with the gifts received by alumni and friends of the school.

HBR publishing is a cash cow

Reflecting competitive pressures in the global publishing market, HBP’s fiscal 2017 top-line growth was slightly below the School’s forecast and the slowest since fiscal 2010. While continuing to make strategic investments in future business growth, HBP shaved millions of dollars off its budgeted cost of goods sold and, as a result, delivered a healthy contribution margin for the year.

HBR group sales remained flat for the third consecutive year in fiscal 2017. The subscription model for Harvard Business Review changed from 10 to six issues annually, resulting in a slight decrease in circulation revenue. This decline was offset, however, by growth in revenue from reprints and advertising. Harvard Business Review subscription renewal rates and online readership were up substantially from the prior year.

It’s quite interesting to notice how HBP managed to transition to digital, and now its primary source of income is the publishing side. It seems that the case studies sold on Harvard Business Review are the most successful piece of content that might be contributing the most to HBP revenues. In 2017, HBP sold 14.8 million case studies!

Endowments are still crucial to HBS sustainability

Although income from HBP and Executive Education makes HBS less reliant on its endowment than other schools at Harvard, philanthropic revenues, including distribution from the endowment and current use gifts, provide financial stability and flexibility that are crucial to the School’s ability to execute on its mission.

Even though HBS has shifted and is shifting to a self-sustaining not-for-profit model. In reality endowment and contributions are still a critical element to the financial stability of HBS as one of the most prestigious academic institutions in the world.

Other case studies:

The Power of Google Business Model in a Nutshell
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Spotify Make Money? Spotify Business Model In A Nutshell
DuckDuckGo: The [Former] Solopreneur That Is Beating Google at Its Game

How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained

Resources:

Business Strategy: Definition, Examples, And Case Studies
What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
How to Build a Great Business Plan According to Peter Thiel
How To Create A Business Model
What Is Business Model Innovation And Why It Matters
What Is Blitzscaling And Why It Matters

The post HBS Not-For-Profit Self-Sustaining Business Model appeared first on FourWeekMBA.

Google’s Cash Cow: Inside Google Advertising Business

In 2018, 85% of Google’s revenues came from advertising. Those revenues represented over $116 billion. Thus, understanding Google’s powerful advertising money-making machine is critical to understand Google (now Alphabet) current business engine.

For that matter you need to understand two key elements:

How Google monetizes its pages
The costs Google incur to acquire traffic

In a media business (yes Google is a media company as of 2019) those two elements are critical to building a business that makes sense. This might seem trivial also for starters.

Yet, in a large organization like Google, which has built an empire on its advertising machine, understanding its dynamic can make you understand how a whole industry (that of digital media) works.

Indeed, if you have a website, you have two issues. First, you need to bring qualified traffic to it. Second, you need to be able to monetize that traffic at a higher rate compared to its costs.

For that matter, you’re a “traffic arbitrageur” as you make money on the difference or delta between the price to acquire traffic and the revenues in selling that traffic back.

Inside Google advertising revenue streams

Thus, going back to Google’s advertising business there are two primary traffic sources:

Distributors and partnerships
Network members

Each of those traffic sources gets monetized differently. Indeed, the traffic coming from distributions and partnerships agreements get driven to Google’s main pages, to be monetized with its paid advertising machine, called Google Ads.

Not all traffic that goes through Google gets monetized directly, as a good chunk of it consists of traffic that goes through websites that rank organically on it. Some of those sites that rank organically on Google are part of its network, so they sell impressions on banners placed by Google on their sites.

To recap:

Google main properties traffic comprise traffic generated by search distribution partners who use Google.com as their default search in browsers, toolbars, and other Google operated properties like Gmail, Google Maps, Google Play, and YouTube

For instance, in 2018 Google properties revenues increased by $18.5 billion compared to 2017. The growth was primarily driven by increases in mobile search and growth in YouTube video advertising,

For that matter, Google takes into account – to measure the success of the monetization strategies on its properties – two key metrics:

Paid clicks change
And cost-per-click change

For instance, in 2018 the cost-per-click for business advertising on Google decreased by 25% according to Google’s annual report for 2018. However, the business continued to grow substantially as more paid clicks were placed on Google.

Why did that happen? Some of the reasons might be a higher budget invested by companies on Google. Also, Google is also monetizing more efficiently its other properties (like YouTube). Yet it might even be because Google is shrinking its organic traffic reach, in favor of paid listings:

In short, it seems Google is becoming more polarized.

On the one hand, Google offers paid listings, that are taking more and more space, especially on mobile devices. On the other side, Google is eating up organic traffic by offering direct answers to its users. This should not be a surprise.

As Google highlighted in its annual report for 2018, “our products have come a long way since the company was founded two decades ago. Instead of just showing ten blue links in our search results, we are increasingly able to provide direct answers — even if you’re speaking your question using Voice Search — which makes it quicker, easier and more natural to find what you’re looking for. You can also type or talk with the Google Assistant in a conversational way across multiple devices like phones, speakers, headphones, televisions and more.”

Indeed, Google’s mission “to organize the world’s information and make it universally accessible and useful” is also its North Star. 

Google network members traffic comprise traffic coming from members part of AdMob, AdSense and Google Ad Manager.

It is essential to have clear in mind the distinction between two ways two consume content:

Mobile: as mobile has become a predominant way for people to surf the web. People using mobile don’t search as much as people using a desktop, as they mostly spend their time through apps. In that scenario, AdMob helps apps developers monetize their in-app advertising
Desktop: on the desktop not all traffic landing on Google’s pages will be monetized directly. Some of that traffic will be monetized via an impression-based system as users land on sites part of the AdSense network

In 2018 Google Network Members’ revenues increased by $2.4 billion from 2017. The growth was primarily driven by strength in AdMob and programmatic advertising buying.

Instead, Google AdSense revenues declined. Additionally, the growth was favorably affected by the general weakening of the U.S. dollar compared to certain foreign currencies.

Understanding Google traffic acquisition costs

Another key element is about its traffic acquisition costs:

[image error]TAC stands for traffic acquisition cost, and that is the rate to which Google has to spend resources on the percentage of its revenues to acquire traffic. Indeed, the TAC Rate shows Google percentage of revenues spent toward acquiring traffic toward its pages, and it points out the traffic Google acquires from its network members. In 2017 Google recorded a TAC rate on Network Members of 71.9% while the Google Properties TAX Rate was 11.6%.

To sustain its traffic, Google spent over $26 billion of its revenues! There is a clear distinction between the way Google acquires traffic at two levels:

Google‘s properties: Google has partnership agreements worth billions with browsers and other distributors
Google network members: Google primary shares its revenues with websites part of AdSense and Apps part of AdMob

In 2018, Google traffic acquisition costs (TAC) increased substantially due to changes in partner agreements. Also, the swift change toward mobile also resulted in higher TAC because on mobile users are channeled through paid access points more frequently. This, of course, is good for Google which makes way more money from mobile, but it also increases its traffic costs.

Also, browsers (are still an essential mobile access point) will want more money from Google to close exclusive deals with them.

Instead, when it comes to the increase in the Network Members TAC rate, this is happening through the fact that more and more publishers part of the AdSense network is switching to programmatic advertising to manage more efficiently their advertising inventory.

Caveat: a weakening U.S. dollar in 2018 played in favor of Google‘s advertising revenues coming from the outside the US. That has affected Google‘s overall advertising revenues. 

What’s going on with Google advertising business?

AdSense revenues are losing against AdMob (in-app advertising). This might be part of a broader content consumption change as more people experience the web through mobile devices and apps
Other revenues touched over $19 billion, as much as revenues coming from network members revenues
YouTube might be contributing to Google main properties revenue growth with its video advertising
Google might be eating up the organic traffic in favor of more paid listings
Google might be eating up the organic traffic in favor of direct answers to its users
TAC rate on Google‘s properties are going up as more people are experiencing the web through mobile, which has more paid access points than desktop
This is also good as Google‘s properties revenues are substantially increasing
More and more publishers part of the AdSense network are monetizing via programmatic, which changes the logic of monetization
Google advertising business remains a cash cow, with high margins and strengthening mobile monetization

Resources:

Business Strategy: Definition, Examples, And Case Studies
What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
How to Build a Great Business Plan According to Peter Thiel
How To Create A Business Model
What Is Business Model Innovation And Why It Matters
What Is Blitzscaling And Why It Matters
Business Model Vs. Business Plan: When And How To Use Them
The Five Key Factors That Lead To Successful Tech Startups
Business Model Tools for Small Businesses and Startups

Case studies:

The Power of Google Business Model in a Nutshell
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Spotify Make Money? Spotify Business Model In A Nutshell
DuckDuckGo: The [Former] Solopreneur That Is Beating Google at Its Game

How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained

The post Google’s Cash Cow: Inside Google Advertising Business appeared first on FourWeekMBA.

Business Strategy: Definition, Examples, And Case Studies

This guide follows a logical structure. I start from analyzing the business model of a company, I then apply a business model essence to it, and we then look at either why a company adopted a certain business strategy and what’s next.

What is a business strategy?

At this stage, it is important to clarify a few critical aspects. As an HBR working paper entitled “From Strategy to Business Models and to Tactics” pointed out:

Put succinctly, business model refers to the logic of the firm, the way it operates and how it creates value for its stakeholders. Strategy refers to the choice of business model through which the firm will compete in the marketplace. Tactics refers to the residual choices open to a firm by virtue of the business model that it employs.

Is business strategy the same thing of a business model?
[image error]A business strategy is a deliberate vision to get toward a desired long-term goal. A business model is a great tool to execute a business strategy. Yet while achieving a long-term goal a business strategy set a vision, mission and value proposition that can be executed through several possible business models. When one of the drafted business models encounters the favor of the market that is when a business strategy becomes successful!
What is a business model essence?

Keeping in mind the distinction between business strategy and business models is critical. The other element used in this guide is a business model essence. Shortly, I’ve been looking for a way to summarize the key elements of any business in a couple of lines of text:

[image error]A Business Model Essence according to FourWeekMBA is a way to find the critical characteristics of any business to have a clear understanding of that business in a few sentences. That can be used to analyze existing businesses. Or to draft your Business Model and keep a strategic and execution focus on the key elements to be implemented in the short-medium term.

Therefore, for that sake of this discussion, you’ll find for each company’s business strategy, a business model essence that will help us navigate through the noisy business world. From there we’ll see what the business strategy of a company.

Is business strategy a science?

Business strategy is more of an art than a science. In short, a business strategy starts with a series of assumptions about how the business world looks like in a certain period of time and for a certain target of people. Whether those assumptions will turn out to be successful will highly depend on several factors.

For instance, back in the late 1990s when the web took over, new startups came up with the ideas of revolutionizing many services. While those ideas seemed to make sense, they turned out to be completely off, and many of those startups failed in what would be recognized as a dot-com bubble.

While at hindsight certain aspects of that bubble came up, which highlighted aspects of the bubble (like frauds, or schemes), in general, some of the ideas for which startups got financed seemed to be visionary.

For instance, some startups tried to bring on-demand streaming on the web (which today we call Netflix, one of the most successful tech companies). The problem is those ideas proved to be too early to prove successful.

They made sense but from the commercial standpoint, they didn’t. Thus, if we were to use the scientific method, once those assumptions would have proved wrong in the real world, we would have discarded them. However, those assumptions proved to be wrong, in that time period, given the current circumstances.

Therefore, while we can use the scientific inquiry process in business strategy, it’s hard to say that it is a scientific discipline.

So what’s the use of business strategy? In my opinion, business strategy is useful for three main reasons:

Focus: chose one path over another
Vision: have a long-term strategic goal
Commerciality: create a self-sustainable business

As a practitioner, someone who tries to build successful businesses, I don’t need to be “scientific.” I need to make sure not to be completely off track. For that matter, I aim at creating businesses.

Thus, I need to understand where to focus my attention in a relatively long period of time (3-5 years at least) and make sure that those ideas I pursue are able to generate profits, which – in my opinion – might be a valid indicator that those ideas are correct for the time being. If those conditions are met, I’ll call it a “successful business.”

Those ideas will become a business model, that executes a business strategy. This doesn’t mean those ideas, turned into a business model, pushed into the world will always be successful (profitable).

As the marketplace evolves I will need to adjust, and tweak a business model to fit with the new evolving scenarios, and I’ll need to be able to “bet” on new possible business models.

Survivorship bias

Survivorship bias is a phenomenon where what’s not visible because extinct isn’t taken into account when analyzing the past. While we analyze the past based on what’s visible today.

This error happens in any field, and in business, we might get fooled by that as well. In short, when we analyze the past we do that at hindsight. That makes us cherry pick the things that survived and assume that those carry the successful characteristics we’re looking for.

For instance, for each Amazon or Google that survived there were hundreds if not thousands of companies that failed, with the same kind of “success” of characteristics of Amazon or Google. If survivorship bias is a common phenomenon, how do we avoid to fall into it?

Lindy effect and aging in reverse

Nicholas Nassim Taleb in his book Antifragile, popularized a concept called Lindy Effect. In very simple terms the Lindy Effect states that in technology (like any other field where the object of discussion is non-perishable) things age in reverse.

Thus, life expectancy rather than diminishing with age, it has a longer life expectancy. Therefore, a technology that has lived for two thousand years, it has a life expectancy of another thousand years.

That is a probabilistic rule of thumb which works on averages. Thus, if a technology (say the Internet) has stayed with us for twenty years, it doesn’t mean we can expect only to live for another twenty years at least. But as the Internet has proved successful already, the Lindy Effect might not apply.

In short, as we have additional information about a phenomenon the Lindy Effect might lose relevance. For instance, if I know a person is twenty, yet sick of a terminal disease, I can’t expect to use normal life expectancy tables. So I’ll have to apply that information in understanding the future.

Caveat: Frameworks work until suddenly they don’t

When you stumbled upon a “business formula” you can’t stop there. That business formula, if you’re lucky will allow you to succeed in the long term. Yet as more and more people will find that out, that will lose relevance. And the matter is, reality is a villain. Things work for years until they suddenly don’t work anymore.

We’ll see some frameworks, but the real deal is not a framework but the inquiry process that makes us discover those frameworks. In short, the value is in the repeatable process of discovery and not in the discovery itself. A discovery once spread it loses value.

Master a business strategy process

There isn’t size-fits-all business playbook that you can apply to all the scenarios. Some of the business case studies we’ll see throughout this article will show companies that have dominated the tech space in the last decade and more. While the playbook executed by those companies worked for the time being.

That doesn’t mean you should play according to their playbook. If at all you’ll need to figure out your own. Thus, what matters is the process behind finding your business playbook and my hope is that this guide will inspire you and give you some good ideas on how to develop your own business strategy process!

Business strategy case studies

We’ll look now at a few case studies, of companies that at the time of this writing are playing an important role in the business world.

Alibaba Business Strategy
Amazon Business Strategy
Apple Business Strategy
Airbnb Business Strategy
Baidu Business Strategy
Booking Business Strategy
DuckDuckGo Business Strategy
Google (Alphabet) Business Strategy

Alibaba Business Strategy

Business Model Essence: Online Stores Leveraging On An E-Commerce/Marketplace Distribution And Monetization Strategy  

As pointed out on Alibaba annual report for 2017:

We derive revenue from our four business segments: core commerce, cloud computing, digital media and entertainment, and innovation initiatives and others. We derive most of our revenue from our core commerce segment, which accounted for 85% of our total revenue in fiscal year 2017, while cloud computing, digital media and entertainment, and innovation initiatives and others contributed 4%, 9% and 2%, respectively. We derive a substantial majority of our core commerce revenue from online marketing services. 

Alibaba, like Amazon, became “everything store” in China. It leveraged on its success to build also other media platforms (Youku Todou and UCWeb). The e-commerce, marketplace business model has become quite common since the dawn of the web.

From that business models tech giants like Amazon, eBay and Alibaba have raised.

[image error]

Alibaba vision, mission, and core principles

Alibaba Business Strategy starts from its core values defined in its annual report as:

Customer First: “The interests of our community of consumers, merchants, and enterprises must be our first”
Teamwork: “We believe teamwork enables ordinary people to achieve extraordinary things.”
Embrace Change  I”n this fast-changing world, we must be flexible, innovative and ready to adapt to new business conditions in order to maintain sustainability and vitality in our business.”
Integrity “We expect our people to uphold the highest standards of honesty and to deliver on their commitments.”
Passion “We expect our people to approach everything with fire in their belly and never give up on doing what they believe is right.”
Commitment “Employees who demonstrate perseverance and excellence are richly rewarded. Nothing should be taken for granted as we encourage our people to “work happily and live seriously.”

Alibaba’s mission is about “to make it easy to do business anywhere,” and its vision is “to build the future infrastructure of commerce… a company that would last at least 102 years.”

For that vision to be executed it has three major stakeholders: users, consumers and merchants. The focus on the “at least 102 years” might seem fluffy words, yet those are important as this kind of goal helps you keep a long-term vision while executing short-term plans.

It isn’t unusual for founders to set such visions, as they help keep the company on track in the long-run. And this is where a business strategy starts. All the business models designed by Alibaba will follow its vision, mission and the values they aim to create in the long-run.

Read: Alibaba Business Model

Alibaba ecosystem and value proposition

These elements gave rise to an ecosystem made of “of consumers, merchants, brands, retailers, other businesses, third-party service providers and strategic alliance partners.”

As Alibaba points out in its annual report “our ecosystem has strong self-reinforcing network effects benefitting its various participants, who are in turn invested in our ecosystem’s growth and success.”

Network effects are a critical ingredient for marketplaces success. To give you an idea, the more buyers join the platform, the more Alibaba recommendation engine will be able to suggest relevant items to buy for others customers, and at the same time the more merchants will join in, given the larger and larger business opportunities.

Keeping these network effects going is a vital element of long-term success but also among the greatest challenge of any marketplace that wants to be relevant.

Even though Alibaba’s essence is in online commerce, the company has several business models running and a business strategy that at its core is evolving quickly.

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Source: Alibaba Annual Report

Thus, the core commerce has made it possible for Alibaba to build a whole new set of “companies within a company.” From digital entertainment and media, logistics services, payment, and financial services and cloud services with Alibaba Cloud.

Thus, from a successful existing online business model, Alibaba has expanded in many other areas. And its future business strategy focuses on developing, nurturing and growing its ecosystem.

More precisely, its strategic long-term goal is to “serve two billion consumers around the world and support ten million businesses to operate profitably on its platforms”

To achieve that Alibaba is focusing on three key activities:

Globalization
Rural expansion
And big data and cloud computing

For its core commerce activities, Alibaba has designed a value proposition that moves around a few pillars:

Broad selection: over 1.5 billion listings as of March 31, 2018
Convenience:  seamless experience anytime, anywhere from online and offline
Engaging, personalized experience: personalized shopping recommendations and opportunities for social engagement
Value for money: competitive prices offered via a marketplace business model
Merchant quality: review and rating system to keep merchants quality high
Authentic products: merchant quality ratings, clear refund, and return policies and the Alipay escrow system

From that value proposition, Alibaba has been able to grow its customer base and offer wider and broader products, until it expanded in the service and cloud business.

Amazon Business Strategy

Business Model Essence: E-Commerce/Marketplace Distribution And Monetization Model Leveraging On Proprietary Infrastructure To Offer Third-Party Services

Started in 1994 as a bookstore, Amazon soon expanded and became the everything store. While the company core business model is based on its online store. Amazon launched its physical stores, which generated already over five billion dollars in revenues in 2017.

Amazon Prime (a subscription service) also plays a crucial role in Amazon overall business model, as it makes customers spend more and being more loyal to the platform. 

Besides, the company also has its cloud infrastructure called AWS, which is a world leader and a business with high margins. Amazon also has an advertising business worth a few billion dollars.

Thus, Amazon business model mix looks like many companies in one. Amazon measures its success via a customer experience obsession, lowering prices, stable tech infrastructure, and free cash flow generation.

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Therefore, even though in the minds of most people Amazon is the “everything store” in reality, its revenue generation shows us that it has become a way more complex organizations, that also has a good chunk of advertising revenue and third-party services.

For instance, Amazon isn’t a key player with its AWS, in the cloud space. And also a key player in the digital advertising space, together with Google and Facebook:

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Amazon has been widely investing in its technological infrastructure since the 2000s, which eventually turned like a key component of its business model.

Read: Amazon Business Model

Amazon vision, mission, and core values

Jeff Bezos is obsessed by being in “day one,” which as he puts it, “day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.“

It all starts from there, and to achieve that Jeff Bezos has highlighted a few core values that make up Amazon‘s culture:

Customer obsession
Resist proxies
Embrace external trends
High-velocity decision making

As pointed out by Amazon, “when Amazon.com launched in 1995, it was with the mission “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” 

This goal continues today, but Amazon’s customers are worldwide now and have grown to include millions of Consumers, Sellers, Content Creators, and Developers & Enterprises. Each of these groups has different needs, and we always work to meet those needs, innovating new solutions to make things easier, faster, better, and more cost-effective.”

In this case, Amazon‘s mission also sounds as a vision statement. Whatever you want to call it, this input is what makes a company look for long-term goals that keep them on track. Of course, that doesn’t mean a well-crafted vision and mission statement is all that matter for business success.

Yet, it is what keeps you going when things seem to go awry. Amazon moved from an online book store to the A-to-Z store it kept its mission almost intact while scaling up.

Start from a proof of concept, then scale up

It is interesting to notice how businesses evolve based on their commercial ability to scale up. When Amazon started up as a bookstore, it made sense for several reasons, that spanned from logistics to pricing modes and industry specifics.

Yet, when Amazon finally proved that the whole web thing could be commercially viable, it didn’t wait, it grew rapidly. From music to anything else it didn’t happen overnight, but it did happen quickly. Thus, this is how Amazon mission shifted from “any book in the world” to “anything from A-Z.”

This isn’t a size-fits-all strategy. Amazon chose rapid growth, similar to a blitzscaling process as aggressive growth was a way to preserve itself. Hadn’t Amazon grown so quickly, it could have been killed. The opposite approach to this kind of strategy is a bootstrapped business, which is profitable right away and self-sustainable.

Decentralized and distributed value creation: the era of platforms and ecosystems

Before we move forward, I want to highlight a few key elements to have a deeper understanding of both Amazon and Alibaba business models and their strategy.

Before digitalization would show its use and commercial viability, most of the value creation processed were internalized. That meant companies had to employ massive resources to generate value along that chain.

That changed when digitalization allowed the value creation process to be distributed, and we moved from centralized to grassroots content creation. This is even clearer in the case of platforms, and marketplaces like Amazon and Alibaba. For instance, where in the past the review process and quality insurance would be done centrally by making sure that the supply complied with the company’s quality guidelines.

By introducing distributed review systems, where the end users checked against the quality compliance, allowed companies like Alibaba and Amazon to generate network effects, where the more users enriched the platforms with those reviews the more the platform could become valuable. For that matter though, the main platform role will be to fight spam and attempt to trick the system.

Other than that (fighting spam is a challenging task) all the rest is managed at the decentralized level, and the value creation happens when more and more users review products and services on those platforms. We’re referring here to the review system, but it applies almost to any aspect of a platform.

Amazon for years allowed third-party to feature their stores on Amazon‘s platform, while they kept the inventory. This meant an outsourced and distributed inventory system, spread across the supply side.

Therefore, the supply side not only made the platform more valuable by creating compelling offerings. But it also made it more valuable from the operational standpoint, by allowing a better inventory system, which could be turned quickly.

Therefore, the critical aspect to understand in the digital era is the decentralized value creation, which makes the value creation process less expensive for an organization, more valuable to its end users, and more scalable as it benefits from network effects.

How to decentralize the value creation? Many platform-like business models have leveraged on a few aspects:

User-generated content (Quora, Facebook, Instagram)
Distributed inventory systems (Amazon, Alibaba)
Peer-to-peer networks (Airbnb, Uber)

This implies a paradigm shift. When you start thinking in terms of platforms, no longer you’ll need a plethora of people taking care of each aspect of it.

Rather you’ll need to understand how the value creation can be outsourced to a community of people and make sure the platform is on top of its game in a few aspects.

For instance, Amazon and Alibaba have to make sure their review system isn’t gamed. Airbnb has to make sure to be able to guarantee safety in the interactions from host to guests and vice-versa. Quora has to make sure to keep its question machine to keep generating relevant questions for users to answer (the supply-side).

If you grasp this element of a platform, you’re on a good track to understanding how to build a successful platform or marketplace.

Apple Business Strategy

Business Model Label: Product-Based Company Leveraging On Locked-In Ecosystems With A Reversed Razor And Blade Business Strategy

Amazon sells its products and resells third-party products in most of its major markets directly to consumers and small and mid-sized businesses through its retail and online stores and its direct sales force.

The Company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers, and value-added resellers. During 2017, the Company’s net sales through its direct and indirect distribution channels accounted for 28% and 72%, respectively, of total net sales.

Many people look at the iPhone, or the previous products Apple has launched successfully in the last decade and assume that their success is due to those products. In reality, Apple has followed throughout the years a strategy that focused on five key elements:

Strong branding
Beautifully crafted products
Technological innovation
Strong distribution
Locked-in ecosystems

In short, Apple can sell iPhone at a premium price because it employes a reversed razor and blade strategy. This strategy implies free access to the Apple’s Ecosystem (ex. iTunes, and Apple Store).

That makes the whole experience through Apple’s devices extremely valuable. Thanks to that experience, the perception of a high-end (luxury-like) products, together with a reliable distribution, justifies Apple’s premium prices.

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By the end of 2018 and the beginning of 2019, Apple experienced a slower cycle of sales for its main product: the iPhone. The company also announced it would stop reporting the number of units sold as a key metric in its financial statements. This is a significant change.

Due to this slow iPhone sale in the last quarter of 2018, publications and people around the world have started to declare the fall of Apple. True, Apple is highly reliant on its iPhone. However, the whole smartphone market might be stagnating in the coming years.

Therefore, Apple’s future success can’t be measured with the same lenses of the last decade. The real question is: what product Apple will be able to launch successfully?

And keep in mind, it’s not just about the product. Apple’s formula summarized above can be replicated over and over again. But it isn’t a simple formula. And as locked-in ecosystems, in which Apple controls as much as possible the experience of its users have proved quite successful in the last decade. That might not be so in the next, given the rise of more decentralized infrastructure.

For that matter, Amazon might be well moving from a reversed razor an blade model:

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To a service-based model:

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This isn’t surprising, as a service business has a few compelling advantages:

High margins
A relatively stable revenue stream
Scalability

As Apple has relied on home runs with its products, from the new Mac to the iPod, iPhone, and iPhones, that kind of success isn’t easy to replicate, and it makes the company relies on a continuous stream of fresh sales to keep the business growing. A service business would balance things out.

It is important to remark this isn’t something new to Apple:

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When Apple introduced the iPhone, it isn’t like it was an overnight success. It was successful, but it had to create a whole ecosystem to make of the iPhone a continuous source of growth for the company!

When it comes to business strategy, as pointed out on Apple’s annual report for 2018:

The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services. The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware, application software and services to provide its customers products and solutions with innovative design, superior ease-of-use and seamless integration.

Understanding this part is critical. As I explained above, at the time of this writing many think of Apple as the “iPhone company.” Yet Apple is way more than that, and its business strategy is a mixture of creating ecosystems by leveraging on these pillars:

Operating systems
Hardware
Applications software
Innovative design
Ease-of-use
Seamless Integration

Those elements together make Apple‘s products successful. As Apple further explained:

As part of its strategy, the Company continues to expand its platform for the discovery and delivery of digital content and applications through its Digital Content and Services, which allows customers to discover and download or stream digital content, iOS, Mac, Apple Watch and Apple TV applications, and books through either a Mac or Windows personal computer or through iPhone, iPad and iPod touch® devices (“iOS devices”), Apple TV, Apple Watch and HomePod.

Once again, it isn’t anymore about creating a product, but about generating self-serve ecosystems. How do you support those ecosystems? It depends what’s your target. A media company will primarily need an ecosystem made of content creators (take Quora or Facebook or YouTube).

In many cases, a digital media company over time has to be able to nurture several communities to create a thriving ecosystem. For instance, large tech companies or startups, often rely on several communities:

programmers and developers (Google, Apple)
content creators and publishers (Google, Quora, YouTube)
artists and creative talents (Apple, YouTube)

In Apple‘s case though, the first ecosystem is the community of developers building third-party software products that complement the company’s offering:

The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company’s offerings.

When you combine that with an high-touch strategy (where skilled and knowledgeable salespeople interact with customers) you create a flywheel, where customers are retained for longer, the brand grows as a result of this high-touch activity which creates a better post-sale experience and triggers word of mouth and referral from existing customers:

The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Company’s products and services greatly enhances its ability to attract and retain customers.Therefore, the Company’s strategy also includes building and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience.The Company believes ongoing investment in research and development (“R&D”), marketing and advertising is critical to the development and sale of innovative products, services and technologies.

Read: Apple Business Model

Airbnb Business Strategy

Business Model Essence: Peer-To-Peer House-Sharing Network With Fee-Based Monetization Strategy

As a peer to peer network, Airbnb allows individuals to rent from private owners for a fee. Airbnb charges guests a service fee between 5% and 15% of the reservation subtotal; While the commission from hosts is generally 3%. Airbnb also charges hosts who offer experiences a 20% service fee on the total price.

The digitalization happened in the last two decades has facilitated the creation of peer to peer platforms which business models disrupted the hospitality model that was created in the previous century by hotel chains like Marriott, Holiday Inn, and Hilton.

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Airbnb is quickly branching out toward offering more experiences. We can call Airbnb the “marketplace of experiences.” In short, just like Amazon started from books, Airbnb has started from house-sharing.

But that is the starting point, that gives the innovative company enough traction to validate their whole business model and expand to other areas.

The principal aim of Airbnb is to control the whole experience for its users. This means creating an end-to-end travel experience that embraces the entire process. Thus, it’s not surprising if we’ll see Airbnb expanding its marketplace to more and more areas.

Just as we’ve seen in the case of Alibaba and Amazon, Airbnb follows a marketplace logic, where it needs to make the interactions between its key users (hosts and guests) as smooth as possible, with an emphasis on safety.

As a platform, Airbnb used initially a strategy of improving the quality of its supply by employing freelance photographers that could take pictures of hosts homes.

This, in turn, made those homes more interesting for guests, as they could appreciate more those homes. As many people in real estate might know, the quality of the pictures is critical.

Although this might sound trivial, this is what improved Airbnb supply side. Indeed with better and professionally taken images, Airbnb improved its reach via search engines (yes, search engines are thirsty of fresh and original content, images comprised). And it enhanced the experience of its potential customers.

Read: Airbnb Business Model

Baidu Business Strategy

Business Model Essence: Online Marketing Free Services Advertising-Supported Revenue Model

Baidu makes money primarily via online marketing services (advertising). In fact, in 2017 Baidu made about $11.24 in online marketing services and a remaining almost $1.8 billion through other sources. According to Statista,

Baidu has an overall search market share of 73.8% of the Chinese market. Other sources of revenues comprise membership services of iQIYI (an innovative market-leading online entertainment service provider in China) and financial services.

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At first sight, Baidu might seem the mirror image of Google, but in China. However, this is a superficial view. While Baidu has followed in China a similar path of Google, and it did take advantage of the fact that Google wasn’t available there, to build its dominant position.

Baidu also has a more efficient cost structure than Google. It had also introduced innovations in its search products (like voice search devices for kids) at a time when Google wasn’t there yet.

Read: Baidu Business Model

Baidu mission: two-pillar business strategy, and value propositions acting as a glue for its key users/customers

In the past years, Baidu has followed an expansion business strategy focused on acquiring assets and companies that complemented its core business model. As the leading Chinese search provider, in 2017 Baidu updated its mission to “Baidu aims to make a complex world simpler through technology.”

This mission is achieved via a two-pillar strategy:

Strengthening the mobile foundation (similar to Google’s mobile-first)
And leading in artificial intelligence

Baidu key partners comprise users, customers, Baidu union members, and content providers. For each of those critical segments, Baidu has drafted a fundamental value proposition. Thus, to generate a value chain that works for these stakeholders, Baidu has to balance it with a diversified value proposition:

Users: enjoying Baidu search experience wants a search engine that gives them relevant results
Customers: with 775,000 active online marketing customers in 2017, consisting of SMEs, large domestic businesses and multinational companies, distributed across retail and e-commerce, network service, medical and healthcare, franchise investment, financial services, education, online games, transportation, construction and decoration, and business services. Those businesses look for a trackable, and sustainable ROI for their paid advertising campaigns. By bidding on keywords, they can target specific audiences
Baidu Union Member: share revenues with Baidy by displaying banner ads on their sites in relevant spaces filled by Baidu search algorithm (think of it as the Google’s AdSense Network). Those publishers and sites can generate additional revenues and monetize their content without relying on a complex infrastructure, that instead is employed by Baidu
Content Providers: video copyright holders, apps owners who list their apps on Baidu app store, or users who contribute their valuable and copyrighted content to Baidu products, and publishers. Those users get visibility or money in exchange for this content. Baidu has to make sure to allow those content providers to get in exchange for their work and creativity visibility and revenues

Understanding how the value proposition for each player comes together is critical to understand the business decisions a company like Baidu makes over time.

For instance, as Baidu (like Google) moves more and more toward AI, the need to balance the value proposition for Baidu Union Members might fickle.

Booking Business Strategy

Business Model Essence: House-Sharing Platform Leveraging On A Two-Sided Marketplace With A Commission-Based Revenue Model

Booking Holdings is the company the controls six main brands that comprise Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com, and OpenTable. 

Over 76% of the company revenues in 2017 came primarily via travel reservations commissions and travel insurance fees. Almost 17% came from merchant fees, and the remaining revenues came from advertising earned via KAYAK. As a distribution strategy, the company spent over $4.5 billion in performance-based and brand advertising.

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Read: Booking Business Model

Booking mission, value proposition, and key players

Booking’s mission is to “help people experience the world.” At the time of this writing Booking does that via a few primary brands:

Booking.com
priceline.com
KAYAK
agoda.com
Rentalcars.com
OpenTable

The mission of helping people experience the world executed via three primary value propositions delivered to consumers, travelers, and business partners:

Consumers are provided what Booking call “the best choices and prices at any time, in any place, on any device”
People and travelers can easily find, book and experience their travel desires
Business partners (like Hotels featured on Booking.com) are provided with platforms, tools, and insights in exchange

At the time of this writing Boomedium-term term strategy is focused on:

Leveraging technology to provide the best experience
Growing partnerships with travel service providers and restaurants
Investing in profitable and sustainable growth

DuckDuckGo Business Strategy

Business Model Essence: Privacy-based Search Engine Built On Google’s Weakness With An Affiliate-based Revenue Model

DuckDuckGo makes money in two simple ways: Advertising and Affiliate Marketing. Advertising is shown based on the keywords typed into the search box. Affiliate revenues come from Amazon and eBay affiliate programs. When users buy after getting on those sites through DuckDuckGo the company collects a small commission.

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While this model might not sound that exciting. DuckDuckGo managed to grow quickly by leveraging on Google’s primary weakness: users’ privacy. Where Google’s primary asset is made of users’ data. DuckDuckGo throws that data away on the fly:

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It is important to remark that DuckDuckGo is still figuring out a business model that can make it sustainable in the long-term. Indeed, the company got a venture round of $10 million back in August 2018.

DuckDuckGo will be tweaking its business model in the coming years, to reach a “business model/market fit.”

Read: DuckDuckGo Business Model

Read: DuckDuckGo Story

Google (Alphabet) Business Strategy

Business Model Essence: Free Search Engine Distributed Across Hardware, Browsers And Members’ Websites With An Hidden Revenue Generation Model

As of 2017, over ninety billion dollars, which consisted of 86% of Google’s revenues came from advertising networks. The remaining fraction (about 13%) came from Apps, Google Cloud, and Hardware. While a bit more than 1% came from bets like Access, Calico, CapitalG, GV, Nest, Verily, Waymo and X.

Google business model is changing over the years. Even though advertising is still its cash cow, Google has been diversifying its revenues in other areas. 

While in 2015 90% of Google revenues came from advertising, in 2017, advertising revenues represented 86%. Other revenues grew from about 10% in 2015 to almost 13% in 2017.

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Why did Google get there? And where is Google going next? To understand that you need to understand the “moonshot thinking.”

Read: Google Business Model

Read: Google Cost Structure

Read: Baidu vs. Google

Understanding Google’s moonshot thinking and a breakthrough approach to business

As highlighted in Alphabet annual report for 2018:

Many companies get comfortable doing what they have always done, making only incremental changes. This incrementalism leads to irrelevance over time, especially in technology, where change tends to be revolutionary, not evolutionary. People thought we were crazy when we acquired YouTube and Android and when we launched Chrome, but those efforts have matured into major platforms for digital video and mobile devices and a safer, popular browser. We continue to look toward the future and continue to invest for the long-term. As we said in the original founders’ letter, we will not shy away from high-risk, high-reward projects that we believe in because they are the key to our long-term success.

Understanding the moonshot approach to business is critical to understand where Google (now Alphabet) got where it is today, and where it’s headed next.

Since the first shareholders’ letter from Google’s founders, Brin and Page they highlighted that “Google is not a conventional company. We do not intend to become one.”

Google has successfully built ecosystems that today drive

Understanding where Google is going next, you need to look at the AI Economy, in which the tech giant is trying to lead the pack. Whether or not it will be successful will highly depend on its ability to keep creating successful ecosystems, just like Google has done with Google Maps (you might not realize but Google Maps powers up quite a large number of applications) and Android.

At the time of this writing, Google is widely investing in other areas, such as:

Voice search
AI and machine learning applications
Self-driving cars
IoT
And other bets

If that is not sufficient Google has made several moves in different spaces, to keep its dominance on mobile, while moving toward voice search, like the investment in KaiOS, which business model is interesting as it finally allows an ecosystem to be built on top of cheap mobile devices in developing countries:

[image error]KaiOS is a mobile operating system built on the ashes of the discontinued Mozilla OS. Indeed, KaiOS has developed a robust standalone mobile operating system that turns feature phones (so-called “dumb phones”) into smartphones-like phones. As feature phones powered by KaiOS have access to mobile apps, connectivity and voice search. KaiOS feature phone business model wants to bring connectivity and the digital revolution to those developing countries (like India and Africa) that have missed out on the smartphone wave due to too high costs of those devices. Besides, KaiOS might be well suited for the IoT revolution!

That is why Google keeps making “smaller bets in areas that might seem very speculative or even strange when compared to its current businesses.”

Those other bets made “just” $595 million to Google in 2018. This represented a 0.4% of Google‘s overall revenues, compared to the over $136 billion coming from the other segments.

Google‘s North Star is its mission of “organizing the world’s information and make it universally accessible and useful.” 

Read: KaiOS Business Model

Key takeaway

I hope that in this guide you learned the critical aspects related to business strategy, with an emphasis on the entrepreneurial world. If business strategy would only be an academic discipline disjoined from reality, that would still be an interesting domain, yet purely speculative.

However, as a business strategy can be used as a useful tool to leverage on to build companies, hopefully, this guide will help you out in navigating through the seemingly noisy and confusing business world, dominated by technology. As a last but critical caveat, there isn’t a single way toward building a successful business.

And often times the way you choose to build a business is really up to you, how you want to impact a community of people and your vision for the future!

Other resources: 

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
How to Build a Great Business Plan According to Peter Thiel
How To Create A Business Model
What Is Business Model Innovation And Why It Matters
What Is Blitzscaling And Why It Matters
Business Model Vs. Business Plan: When And How To Use Them
The Five Key Factors That Lead To Successful Tech Startups
Business Model Tools for Small Businesses and Startups

The post Business Strategy: Definition, Examples, And Case Studies appeared first on FourWeekMBA.

What Is Relationship Marketing And Why It Matters

Relationship marketing is connecting with your current customers through various marketing campaigns and promotions with the main idea of creating loyalty and retaining the customer.

A relationship marketing strategy focuses on converting single sales to repeat sales, it has a dedicated budget to meet the customer acquisition cost and creates lasting relationships with the customers by gaining their loyalty. It plays a vital role in growing and sustaining your business.

As a marketer, you might think it’s less expensive and easier to sell to your current customer base. But, that’s not the case. The fierce competition in the market, the promotions and offers that are rolled out to woo the customers, create a big dent in your revenue plan.

Relationship marketing is the future

Traditional transactional marketing revolves around two main principles – gauging the interest of your audience and making a transaction (selling the product or service). This transaction, at the same time, brings revenue to the brand and solves the customer’s problem.

Scoring a conversion or closing a sale is the source of joy for every business owner, but there is one big problem – it’s a one-time thing.

A customer can easily find a better brand and purchase their product the next time they have the same need. What makes relationship marketing special is that conversions and sales aren’t the goals – they’re just the beginning of a relationship. This approach to marketing helps your brand flourish thanks to basic human psychology.

The psychology behind relationship marketing

Your average customer doesn’t purchase services or products because of boredom. They do so because they have a need that is to be fulfilled or a problem that has to be solved. When a person makes contact with your brand, their loyalty in the future depends on three key factors.

Trust. The brand or service is as good as advertised and better, ensuring the customer that they won’t be swindled. If your services are stellar, why should a customer risk getting swindled or having an underwhelming customer experience?
Knowing that the brand cares. When a person sees that a brand genuinely cares about how they feel and how do they interact with the product, they will appreciate it. After feeling wanted and establishing communication with a brand, people return to it willingly and with pleasure.
Mitigating possible problems. A lot of people expect a service to be perfect. Transactional marketing is designed to learn from mistakes or flaws and give up on the customer. Relationship marketing, on the other hand, focuses on finding solutions to the problems and showing people that the brand is as human as they are.

Fostering a relationship with your customers starts by establishing trust, followed by acts of care and goodwill. The relationship only becomes rock solid if you invest enough effort into mitigating problems, not just preventing them.

All of this results in an overwhelmingly positive customer experience, which evokes emotions and creates a connection. But how can relationship marketing benefit your business?

Loyalty also means spending less

Did you know that just a 2% increase in customer retention results in as much as 10% less expenditure? It is indeed true. When you think about it, acquiring a customer is expensive.

To reach just one customer, you have to invest a lot of time and resources for gathering analytics, designing a campaign and targeting the right people. Relying solely on attracting new customers is an unsustainable business model.

For small businesses, relationship marketing is more important than anything else. If you start right and establish close relationships with your customers, they will form a customer core. This means an increase in both sales and a decrease in expenditure on aggressive marketing campaigns.

Relationship marketing reinforces word-to-mouth

Word-to-mouth marketing is more powerful than even the most efficient inbound strategy. According to Nielsen, 92% of consumers trust recommendations from people close to them more than anything else. By fostering strong relationships with your customers, they will start talking about your brand to those around them.

Since belief in those around is so deeply rooted, strong relationships with existing customers will attract new ones. Not only will your brand grow, but you won’t have to spend a cent on elaborate customer attraction strategies. The best advertisement is a happy customer.

An unlimited source of information

By having developing relationships with your customers, you gain much more than finances and popularity. With every interaction with one customer, you will find out more and more about them. There is so much you can find out about what they like and what should you focus on.

Use social media channels to demonstrate your willingness to form relationships. Act smart and implement tools such as EssayWritingLand. With it, you can outsource content for your page or blog. Order blog posts with a tone specially designed to let the audience know you want to be their friend, not just a mere service provider.

Don’t stay complacent. Relationships require a lot of work. Monitor your most successful relationships and repeat all the right things.
Follow trends and read a lot. Improving relationships while they’re already functional will make them even closer.
Communicate. Respond to all comments, review – especially the negative ones. Use social media to show your audience that you care.

Concluding thoughts

Growing a business is inseparably tied to growing your brand-customer relationships. By adopting the principles of relationship marketing, you will save money and accomplish all your goals. Slowly, you will become more than a brand. By nurturing relationships with customers, you become an integral part of their lives, improving your reputation and bettering the world at the same time.

Guest contribution by Alexandra Reay: an editor and a regular contributor to EssayShark project. She is also a professional content writer who prefers to do research on the following topics – self-improvement, technology innovations, global education development ets. 

Resources for your business: 

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
How to Build a Great Business Plan According to Peter Thiel
How To Create A Business Model
What Is Business Model Innovation And Why It Matters
What Is Blitzscaling And Why It Matters
Business Model Vs. Business Plan: When And How To Use Them
The Five Key Factors That Lead To Successful Tech Startups
Business Model Tools for Small Businesses and Startups

What Is The Difference Between A Business Model And A Business Strategy?

Case studies:

The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Spotify Make Money? Spotify Business Model In A Nutshell
The Trillion Dollar Company: Apple Business Model In A Nutshell
Amazon Case Study: Why from Product to Subscription You Need to “Swallow the Fish”
What Is Cash Conversion Cycle? Amazon Cash Machine Business Model Explained
Why Is AWS so Important for Amazon Future Business Growth?

The post What Is Relationship Marketing And Why It Matters appeared first on FourWeekMBA.

What Is A Business Model Essence And Why It Matters

A Business Model Essence according to FourWeekMBA is a way to find the critical characteristics of any business to have a clear understanding of that business in a few sentences. That can be used to analyze existing businesses. Or to draft your Business Model and keep a strategic and execution focus on the key elements to be implemented in the short-medium term.

What is and why a Business Model Essence is important

Not all businesses are born equal. We can categorize them based on several characteristics and based on the level of granularity we can find more or fewer differences.

A solo business isn’t as complex as a ten-person business, which in turn isn’t as complex as a hundred person business. And the matter is complexity isn’t a simple game.

It works on exponential grounds. A group of ten people isn’t the same creature compared to a group of a hundred people. In short, in business, we have a problem with scaling, due to the dynamics of complex systems.

Therefore, the system that I’m using here tries to reduce complexity by trying to find the essence of any business, which by per se is a herculean task.

That essence might be useful for several reasons. For instance, as FourWeekMBA is followed by business students, professors, executives and entrepreneurs, each of those people will use a business model essence with a different aim in mind.

At the core, a business model essence wants to be a snapshot, yet it is essential not to take it too seriously otherwise the risk is to make it become a cartoon.

A student or a professor of business will use it to summarize what she thinks a business is made of. An entrepreneur might use it to focus on how to grow its own business or how to compete with existing organizations in a specific industry.

Business models and their essence are made of assumptions. Assumptions need to be tested in the real world. And this is the whole point of business strategy.

A triad to find the business model essence of any company

Having specified the limitations of this approach, we can now turn to it and see what elements allow us to extract a business model essence. In particular, I argue that there are three key elements any business will need to master to generate a successful business model:

Core product or service: the whole process of finding product/market fit is about “being in a good market with a product that can satisfy that market,” (quote by Marc Andreessen). You can have the best distribution strategy or sales team in the world, but without a product or service that the market need (unless you have unlimited investors’ money) your company will go bankrupt
Core distribution strategy: while the product and the service matters. Once you do have a good product or service, the remaining success of the organization’s growth is a distribution strategy that allows an organization to grow over time
Core monetization strategy: what’s the part of the business that makes more money at higher margins? And who’s the customer (not the user) of a service/product? Thinking about the core monetization strategy emphasizes the customer rather than the user

I use the term “core” as many companies (especially large ones) have a business model that is made of many products or services, delivered through several distribution channels, and where each of those might have a separate monetization strategy.

For the matter of finding the essence, we’ll look at the core product/service, distribution channel, and monetization strategy as this is a good starting point to have a snapshot of a company.

Once we have figured the essence of that company, we can understand what’s next and how the resources that are getting unlocked by their main products, distribution channels, and monetizations strategies are getting used to creating new ones!

In the infographic that accompanies this article you can see three key examples and how we can extract their essence.

Resources for your business: 

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
How to Build a Great Business Plan According to Peter Thiel
How To Create A Business Model
What Is Business Model Innovation And Why It Matters
What Is Blitzscaling And Why It Matters
Business Model Vs. Business Plan: When And How To Use Them
The Five Key Factors That Lead To Successful Tech Startups
Business Model Tools for Small Businesses and Startups

What Is The Difference Between A Business Model And A Business Strategy?

Case studies:

The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Spotify Make Money? Spotify Business Model In A Nutshell
The Trillion Dollar Company: Apple Business Model In A Nutshell
Amazon Case Study: Why from Product to Subscription You Need to “Swallow the Fish”
What Is Cash Conversion Cycle? Amazon Cash Machine Business Model Explained
Why Is AWS so Important for Amazon Future Business Growth?

The post What Is A Business Model Essence And Why It Matters appeared first on FourWeekMBA.

What Is Back-end Business And Why It Matters

We’re used each day to deal with products or services that become an essential part of our daily lives. From websites like Facebook and Google. Entertainment services like YouTube and Netflix. Products like Apple’s iPhones and Mac computers.

Anything around us is driven by a few companies that make up for most of our experiences. Yet we know a lot about those products and services, as we use them on a daily basis.

But we know very few about how those companies work, what their back-end looks like, how they monetize, what keeps them going, and what makes them successful, what is their motivation and why they “act” the way they do.

In the past years, I’ve been studying any business as a hobby, until I turned this passion into the FourWeekMBA. I’ve been quite surprised to find out how a few people know the way the companies that most influence their lives work.

A few realize why those companies’ algorithms or organizations are structured the way they are. And how it all ties out to their bottom line and the motivation of their founders, shareholders and a core community around it.

That insight made me want to dig deeper and deeper to dissect more and more companies, as I realized I could add a lot of value to more and more people. The first step to unlock this understanding is to grasp the difference between front-end and back-end business.

Back-end business vs. front-end business

There is a part of any business that anyone can see. Usually, this is the customer-facing side of a company. Everything that deals with customers, from its segments, channels relationship and how a value proposition and perception about a product or service is delivered.

While this side is important, there is an even more critical part, the back-end business. The back-end business is anything hidden from the eyes of customers. Things like the key activities and resources an organization has in place to make its product and service valuable in the eyes of its customers.  Other operational activities like inventory and manufacturing management, accounting and finance, distribution, IT and engineering, and human resources are all part of back-end business. This also implies the cost structure and partnership in place that makes the company able to thrive in the marketplace. And the way a business monetizes its resources.

Why is back-end business the key to unlock insights

Front-end business is the first step to unlocking a clear understanding of the companies that most influence our lives. However, if you want to understand what motivates those companies, you need to open the hood and look under it. You’ll figure out things that you would have never imagined.

For instance, would you imagine that a search engine like Google pays billions of dollars in partnership each year, to have millions of people going back to it each day?

Do you know that Facebook makes 99% of its money from advertising? Or that Netflix spends billions of dollars on content production? That Google is still mostly owned by its two co-founders and Amazon is still mostly owned by its founder? And that Amazon lower its margins on purpose to accelerate growth?

All those things you can know if you start looking at the business back-end. That is why on FourWeekMBA I devoted most of my focus on business modeling, business, marketing, and distribution strategies.

When you do understand those key aspect of a business, you can say you grasped the business back-end of a company, which in turns might make you a better executive or entrepreneur.

Resources to master the back-end of any business: 

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
How to Build a Great Business Plan According to Peter Thiel
How To Create A Business Model
What Is Business Model Innovation And Why It Matters
What Is Blitzscaling And Why It Matters
Business Model Vs. Business Plan: When And How To Use Them
The Five Key Factors That Lead To Successful Tech Startups
Business Model Tools for Small Businesses and Startups

What Is The Difference Between A Business Model And A Business Strategy?

The post What Is Back-end Business And Why It Matters appeared first on FourWeekMBA.

What Is The Difference Between A Business Model And A Business Strategy?

A business strategy is a deliberate vision to get toward a desired long-term goal. A business model is a great tool to execute a business strategy.

Yet while achieving a long-term goal a business strategy set a vision, mission and value proposition that can be executed through several possible business models. When one of the drafted business models encounters the favor of the market that is when a business strategy becomes successful!

A background story of how I got to business modeling and business strategy

For years I’ve been studying businesses with different emphasis and perspectives. When I was around seventeen, I got interested in the stock market, so I wanted to understand how companies worked.

Thus, I did what it seemed most logical to me. I looked at their stock prices and how they moved over time. Analysts would call this technical analysis. While the technical analysis does have some usefulness for investing, you might use it without knowing much about the business and look at the price patterns that form over time.

In the years that followed I learned how to look at other aspects of a business, from its organizational structure to its products and how the company invested its money.

Later on, during my MBA I started to have a more strategic understanding of businesses by looking at the way they structured the operations, developed their product or service, and what kind of monetization they used.

However, when I later worked as a financial analyst, my focus went primarily to the company’s balance sheets. I followed the money, how it moved from one account to the other and what logic is followed. I realized I could “extract” a company’s strategy by looking at their financials.

There was still a piece missing though. While numbers are great to have an understanding of how the company moved and what motivated it in the short-term it was hard to have a long-term vision.

Thus, I looked for other frameworks I could use, and I could integrate to have a complete theory of firms. That is where business modeling came in handy. I could look at a few key elements to have a current picture of a business. Business model theories and frameworks are primarily rooted in the digital transformation era.

When companies realized the importance of the web not just as a new channel, but as a business world in its own sake.

I studied several tools, theories, from the academic to the tools put together by practitioners. Integrating financial analysis with business modeling gave me a better framework to formulate and gain a better understanding of any company. That is how I moved from financial analysis to business strategy.

Business strategy vs. business modeling

Put shortly; a business model allows you to capture the present picture of an organization. Or it helps you design how you want a company to look like in the future. Thus, to find an analogy a business model is more like a picture or a painting.

A picture in the case of a company that has an existing business model which turned out successfully in the marketplace. And more like a painting in the case of a company for which you’re designing a whole new business model.

A business strategy is a way to get there. You know where you want to be, you have a mission and a vision, you crafted a unique value proposition, and a deliberate plan to get where you want to be.

For that matter, a business model is a great tool to apply a business strategy. In this case, the business strategy sets up the value proposition, which is the foundation of any business model. A value proposition can change over time as it needs to adapt to the market and meet the real value for your potential customers.

Thus, where a business model is the painting, the business strategy is the hand that draws that painting.

As an HBR working paper entitled “From Strategy to Business Models and to Tactics” pointed out:

Put succinctly, business model refers to the logic of the firm, the way it operates and how it creates value for its stakeholders. Strategy refers to the choice of business model through which the firm will compete in the marketplace. Tactics refers to the residual choices open to a firm by virtue of the business model that it employs.

Business strategy to reduce noise and set a clear direction

Understanding a company’s framework and how it “behaved” in the marketplace has become critical. I want to remark that companies are not people.

Companies are made of many moving parts. And even though I’m referring to companies as “behaving” in a certain way, I’m not conveying this is a scientific methodology.

I see business strategy more as an art than a science. And it’s not even a technological issue. Progress in machine learning or artificial intelligence probably won’t do any good to business strategy. Indeed, while machine learning is pretty good in detecting pattern in the real, physical world.

When it comes to the more fluid business world, things get messy. So messy indeed, that the level of noise might be higher than the actual signal. In that respect what we call instinct or gut feelings might be more suited than a machine learning tool for understanding the future.

That is why I seek straightforward thinking tools to analyze the business world. It’s important not to get bogged down in too complex analyses, but be very wary of the kind of data ore metrics we use to track our business success.

For that matter a useful business strategy thinking tool has to have three main features, I believe:

No frills: for instance, instead of adding complexity it reduced it. Thus, instead of having to have complicated infrastructure anything that you can hold on top of your mind is a great business thinking tool
Profound yet straightforward: in many cases, one page is all we need to make significant decisions
Short but exhaustive: the result of a useful business thinking tool has to come up with a concise insight that can be fitted in maximum two lines of text summarizing the current scenario

Summary and conclusions

Where a business model is a possible way to get to a desired strategic long-term outcome. A business strategy is what sets things in motion and what keeps a long-term focus. A good business strategy – in my opinion – has to be straightforward, it has to reduce the noise, and even though a bit simplified it needs to be exhaustive and profound!

Other resources and business thinking tools: 

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
The Rise of the Subscription Economy
How to Build a Great Business Plan According to Peter Thiel
What Is The Most Profitable Business Model?
The Era Of Paywalls: How To Build A Subscription Business For Your Media Outlet
How To Create A Business Model
What Is Business Model Innovation And Why It Matters
What Is Blitzscaling And Why It Matters
Business Model Vs Business Plan: When And How To Use Them
The Five Key Factors That Lead To Successful Tech Startups
Business Model Tools for Small Businesses and Startups

How To Use A Freemium Business Model To Scale Up Your Business

The post What Is The Difference Between A Business Model And A Business Strategy? appeared first on FourWeekMBA.

Digital Business Models Map: The Most Popular Digital Business Model Types

A digital business model might be defined as a model that leverages on digital technology to improve several aspects of an organization. From how customers interact, to how the value proposition is derived, or how monetization happens.

We all like to think of digital business models as innovative in their own sake. However, in many cases innovation happens by combining aspects from existing business models to create a unique formula.

Almost like taking the same ingredients, remixing them by using different quantities and cooking time, an “innovative” business model is often the results of those recombinations.

In this article, we’ll look at a few digital business models types that have become predominant on the web, and that can be used for your next digital business.

Open source business model

An open source model makes software free to access, and it generally gives the ability to a community of programmers to contribute to it. Those two ingredients are essential. Free makes it spread very quickly. And the community side of it is what eventually determines its success.

An open source isn’t a model on which companies can leverage to build a sustainable business model. Companies like Red Hat, for instance, make money by charging premium subscriptions and for training and services associated with its open source software.

Indeed, in 2018, Red Hat generated over $2.9 billion in revenues, of which, $2.57 from subscriptions and $346 millions from training and services. Red Hat isn’t the only possible way to monetize an open source software.

For instance, we covered already the Mozilla Business Model and how its for-profit side makes money through partnerships and distribution agreements with search engines.

[image error]The 94% of Mozilla Corporation’s revenue comes from royalties earned through Firefox web browser search partnerships and distribution deals. According to StatCounter back in 2008 Mozilla Firefox controlled over 26% of the browser market. Today, due to the market dominance of Google Chrome and Safari, Mozilla has a 5% market share.

Going back to Red Hat case study by looking at its annual report Red Hat explains its business model as it follows:

Development. We employ an open source development model. The open source development model allows us to use the collective input, resources and knowledge of a global community of contributors who can collaborate to develop, maintain and enhance software because the human-readable source code for that software is publicly available and licenses permit modification.

Licensing. We typically distribute our software offerings under open source licenses that permit access to the software’s human-readable source code.

Subscriptions. We provide our software offerings primarily under annual or multi-year subscriptions as well as ondemand through our certified cloud and service providers (“CCSPs”).

Therefore, as highlighted in its annual report, thanks to the open source business model, Red Hat has three key advantages:

quick and effective development via a global community of qualified contributors which are not on the company’s balance sheet
great distribution via free licensing of its software
paid subscriptions for premium and enterprise customers

Building up an open source-based business model isn’t simple and it’s success highly depends on the ability of the project to engage the community of developers and contributors in working on the source code to improve it and make it very valuable.

Also, such a model where a free service does allow strong marketing for the product. But it doesn’t necessarily translate in revenues for the company. For instance, Red Hut in 2018 employed $1.2 billion in sales and marketing expenses to distribute its paying subscriptions.

That represented 41% of its total revenues which comprised “primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials and trade shows.”

Free model

The free model has become quite pervasive on the web. Starting from Netscape going on, companies have built great products, released them for free with the hope that once enough people would get used to them, monetization would not be an issue.

While this model worked pretty well for products that scaled up quickly, amassed investments to sustain their infrastructure in the short term, and then found a monetization strategy.

Companies like Google and Facebook have started in this way. They released a free service to a larger and larger user base. Attracted the first angel investors, then venture capitalists they had to then quickly turn to the advertising model to monetize their users, to avoid being left without cash and investors.

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Thus, while a free service allows to scale up at a marketing level, the company will still have to figure out how to monetize the service provided. There are usually a few routes:

A basic version of the product, and a more advanced paid version (freemium model)
One side gets the service for free, and the other side finances it (asymmetric model)
Training materials or info products adjacent to the core topic of the product (educational model)
A free basic service, and a more advanced paid service (usage model)
A job board that connects talented people with employees (job board model)

Those are just some examples of how an open source model can be monetized.

Freemium model

The freemium model has gained in popularity in the last decade. The reason is simple; this model allows a high virality growth. Cases like Dropbox, MailChimp, Spotify, and many others have created viral growth thanks to these models.

At its core, a freemium model has a free version available to anyone, with no friction. Prompts within those free services to switch to paid subscriptions to get more volume, no advertising or more data.

[image error]Spotify is a two-sided marketplace where artists and music fans encounter on a single platform. Founded in 2008 with the belief that music should be universally accessible with a seamless experience based on streaming audio and video. It generated over €4 billion in 2017, of which almost 90% based on premium memberships and 10% based on a free service which is ad-supported. The company recorded an operating loss of €378 million in 2017.

For instance, Spotify offers a free limited service, advertising-supported. But if users decide to get the premium service, they can listen to music without interruption from advertising and also download music to listen offline.

Dropbox instead, makes you use more space with a premium service. And MailChimp gives you advanced features and the ability to handle more subscribers in your email list.

If you opt to this model, you need to make sure you have the following:

A strong enterprise customer base
An optimized conversion funnel to switch free users in paid ones
A robust technological infrastructure that can handle a broad base of free users

Subscription-based model

We’re living in a subscription economy. The most entertaining and costumer-centered services we know today, from Netflix to Spotify and Amazon Prime follows a subscription model.

This model can be very powerful as it carries a few built-in advantages:

A loyal user base
A continuous stream of predictable revenues
A more predictable sales pipeline

In short, many companies are “subscribing” to this model as it allows them to build a sustainable revenue stream over time. However, it is essential to remark that creating this kind of model isn’t a simple task.

Indeed, companies like Netflix and Spotify spend billions of dollars in producing original content that can make those subscribers wanting to renew their plan.

[image error]Netflix is the subscription service that is changing the way we consume traditional media. From series like Stranger Things, Narcos and Black Mirror Netflix have been able to become a titan of the media industry, with more than a hundred and fifty thousand members across the globe.

Usually, a model that relies on a subscription also requires essential investments in infrastructures, as what makes the services offered through this model is the ability of those platforms to know precisely what to watch or listen to next.

Also, you’ll need to build a process skewed toward a great customer experience to minimize churn rates and improve the lifetime customer value. When your CAC or customer acquisition cost is higher than the lifetime value of your customers, your business will soon be bankrupt.

On-demand model

The Web finally allowed people to consume content at their own pace and schedule. What mass media, like TV and Radio, didn’t accomplish, the Web did. An on-demand consumption allows people to have access to the content at different time intervals.

Also, it doesn’t make sense any longer to have a single product or service offering for anyone at scale. Thanks to the on-demand model

This is true for content but also any other kind of service. Netflix had popularized this model when it made available at any time its shows through the platform.

Yet other services, like Uber, and Lyft also built their success by leveraging on the on-demand model. As technological platforms allow people to interact instantaneously, it makes possible those kinds of services.

[image error]Uber follows a business model become popular in the era of technological innovation. This is called two-sided marketplace, and it has a simple premise. You create a platform with great user experience, some elements of gamification, make it easy for two sides of a transaction to connect. This happens especially in industries where those two sides were prevented from transacting as the industry was dominated by a third party, which extracted most of the profits for that industry. When that third party is removed via the two-sided marketplace, the owner of the platform collects a fee from both sides of the transaction.

The on-demand model can be monetized in several ways. From subscriptions to fees for each transaction on a platform.

The critical ingredient is to create a smooth user experience, in which you barely realize there is someone in the backend manufacturing that experience.

Peer-to-peer, two-sided marketplace

A peer-to-peer marketplace is a platform where usually two sides are participating in a transaction, which can be about products (Etsy) or services (Uber, Airbnb, LinkedIn).

A peer-to-peer, or two-sided marketplace often fall into the chicken or the egg dilemma, where the marketplace to work needs both sides to interact.

Yet the paradox is that to have demand on the platform you need a continuous generated supply. At the same time to have supply you need to create demand.

Imagine the Uber case; the platform works as soon as there are enough drivers on the road to offer an on-demand and convenient service when riders need it.

However, drivers want to drive at their convenience and when the fees are high enough to justify their effort. Therefore, the peer-to-peer marketplace usually faces several challenges in making sure the supply side is served adequately to justify demand.

Uber, Airbnb, Etsy all face this issue. For instance, Uber uses several strategies to enhance the supply of drivers on its platform by using dynamic pricing strategies, like surge pricing.

[image error]

You can appreciate the importance of drivers supply for Uber by the fact that companies like HyreCar have built their whole value proposition based on the supply scarcity on Uber.

[image error]HyreCar is a peer-to-peer marketplace where owners of cars can rent their idle vehicles to drivers that want to make an additional income via ride-sharing services like Uber, and Lyft. As a two-sided marketplace, HyreCar makes money by charging drivers for direct insurance and a 10% fee on the weekly rental expense. And by taking a 15% fee from owners weekly rental income.
E-commerce model

One of the first companies that proved the web wasn’t made just of connected computers but of people ready to purchase physical stuff on it was Amazon. Started as a book store the company soon branched out to sell music and related products. Until it became the everything store!

[image error]

Today an e-commerce business model is taken from granted and is among the most used digital business models.

Ad-supported model

If Amazon had proved that the web could become an everything store, a company that changed the way media could be consumed was Google. Rather than just having to type a website address in a browser, people could search for anything they wanted.

Google made all its services, and apps completely free. While on the other side it monetized the data captured via its search engine pages with an advertising network called AdWords (now Google Ads).

When Google IPOed back in 2004, it showed to the business world how powerful its digital advertising business was. Indeed, in a matter of a few years, Google passed the billion dollars mark. In 2017 its advertising business passed the hundred and ten billion dollars mark!

To make sure, while a digital advertising business might be easy to set up, it’s not an easy one to run and make profitable. Unless you’re Google or Facebook with their dominant advertising marketplaces, you won’t be probably able to make money via advertising alone unless you have a very large users’ base.

[image error]Google primarily makes money via its advertising network that in 2017 generated 86% of its revenues. Then, the other side of the business – almost 13% of its revenues in 2017 – comprised money from the Apps, in-app purchases, and digital content in the Google Play store, Google Cloud offering and Hardware products. The remaining part is attributable to Google “other bets” a set of risky businesses Google is betting on.
Hidden revenue generation model

Hidden revenue generation is about making money while the people that most use your service barely realize that. A great example is Facebook (and Google).

If you ask an average Facebook or Google user, she won’t know how the company monetizes. That’s because those companies have invested massive resources in creating this kind of experience.

[image error]In the first nine months of 2018, mobile advertising was estimated at 92% of the total advertising on Facebook products. Active monthly users decreased from 376 million to 375 million in Europe. In the US and Canada, users increased from 241 million to 242 million. At the same time, average revenue per user grew worldwide. Besides all the buzz of 2018, the Facebook business model seems (for now) unshakable.
It’s all about mixing things up

Each model we saw above isn’t a blueprint that can be applied entirely to a company. Often business models are the fruit of the combination of several models. For instance, Airbnb and Uber are on-demand, peer-to-peer marketplaces.

Many businesses we analyzed throughout the article uses several models to build a successful business model. For instance, Google leverages on an open source model for some of its products, while it monetizes its core product (the search engine) with a hidden revenue model and it also leverages on making its products free to large masses to gain traction quickly and make of its products a standard!

Other handpicked resources:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
How to Write a One-Page Business Plan
The Rise of the Subscription Economy
How to Build a Great Business Plan According to Peter Thiel
What Is The Most Profitable Business Model?
The Era Of Paywalls: How To Build A Subscription Business For Your Media Outlet
How To Create A Business Model
What Is Business Model Innovation And Why It Matters
What Is Blitzscaling And Why It Matters
Business Model Vs Business Plan: When And How To Use Them
The Five Key Factors That Lead To Successful Tech Startups
Business Model Tools for Small Businesses and Startups

How To Use A Freemium Business Model To Scale Up Your Business

Handpicked popular case studies from the site: 

The Power of Google Business Model in a Nutshell
How Does Google Make Money? It’s Not Just Advertising!
How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Spotify Make Money? Spotify Business Model In A Nutshell
The Trillion Dollar Company: Apple Business Model In A Nutshell
Amazon Case Study: Why from Product to Subscription You Need to “Swallow the Fish”
What Is Cash Conversion Cycle? Amazon Cash Machine Business Model Explained
Why Is AWS so Important for Amazon Future Business Growth?

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What Is A Negative Externality In The Digital World?

Back in the late 1990s, the web looked pretty much like the Wild West; anyone could grab a piece of digital land, put a name on it and start catching the attention of millions of users at the time, with a very lean team of people.

This is how it started when the Netscape team, after having released their browser, made it available to millions of people in, at the time, nascent web. Netscape later IPOed and made clear to the world, that the Web was much more than just a few computers connected.

Ever since new entrants have learned to dominate the scene, yet, over the years one thing has become clear.

The most important asset on the web is people’s attention. Thus, web companies learned how to grab it, manipulate it, until the Web became a meme machine.

If there is one thing our brain is good at is at creating and passing on memes. And the web became its maximum expression.

The meme machine didn’t just represent the Web. The Web was also driven by a business model, which we’ll call “attention merchant.”

The era of attention merchants

At the core, an attention merchant is a business that makes money by monetizing the attention of its people. More specifically, the attention merchant usually offers a free service, a frictionless experience, and releases it to the masses. Those masses share, and spread their “social experiences,”

This model is by nature, asymmetric, hidden from the eyes of its distracted users, and abundant. The maximum expression of it it is the newsfeed. A slot-machine-like mechanism that allows people to spend hours scrolling through their screens, without conscious effort and no understanding of what goes on behind the scene.

This process can’t be conscious, as it needs to be entirely driven by a willingness to show up no matter what. This content-generating machine is mostly grassroots-based, ready to be consumed by anyone, anywhere. Gossipping, once an essential tool for socializing, all of a sudden becomes an end in its own sake.

The company that most depicts this business model is Facebook. A blue logo with a white “F” generated almost forty billion dollars in 2017, thanks to its unlimited, frictionless money-making machine. This money-making machine is advertising-driven.

Hidden ads or what its founder calls “targeted ads” can be so subtle to be taken for real content. This we call innovation, and we admire as business people. Indeed, that innovation has been generating “engagement” for marketers and businesses across the world at a high price and high margins. This is pure business genius.

Move fast with stable infrastructure

For years, Facebook’s founder’s — Mark Zuckerberg– motto has been “move fast and break things.” This motto helped the company scale from a single computer in a dorm room to one of the largest tech companies in the world.

Yet, back in 2017, that motto changed to “move fast with stable infrastructure.” This is a paradigm shift from both a technical and business standpoint. From a technical perspective, as Facebook has grown among the most popular sites on earth, it soon realized that its moving fast was also becoming too costly.

Indeed, a bug, that once was not risky and inexpensive- in a platform where billions of people interact each day — that bug would have meant days and teams of people to fix it! Thus, from the business standpoint, this would have also caused large expenses and missed opportunities.

However, there is a third and critical point — I argue. As those tech companies have such a reach, a simple bug can carry such a significant negative externality that any benefit they have created would be swept off in a matter of minutes.

Negative externalities in the era of FAANG

A few tech companies have become so ubiquitous and present in our daily lives, that we also have an acronym for their combined effects: FAANG. Those are Facebook, Apple, Amazon, Netflix and Alphabet’s Google, which now have their own index on Wall Street.

It’s easy to measure their positive impact on society by looking at the number of interactions on Facebook, of Google’s searches each day, of Amazon’s transactions, Netflix’ watch time and Apple’s iPhones sold. It’s also easy to compute their growth and the wealth generated to its investors by looking at their financial statements. However, what’s hard yet truly important is the understanding of negative externalities those companies might carry.

A negative externality happens when the social marginal costs exceed the social marginal benefits. In short, a company produces a net loss for society overall. This concept is well known especially in the industrial world, where a few companies pollute the environment and create a negative net balance for society overall. In those cases, there are two main routes, either we live with it, or the Government places a tax on those polluters.

What if we tax attention? The Pigovian tax on attention’s polluters

While pollution can be detected, negative social externalities tied to people’s “polluted attention” are hard to measure, let alone track. However, that should not discourage us from attempting. Companies that lock-us into their platforms for the sake of monetizing our attention might be entertaining us, but also creating a military of zombies.

We might also argue that Facebook is an excellent tool for keeping us from thinking about the things that matter the most. Just like Roman Emperors used the formula of panem et circenses (bread and circuses) to distract the masses with ample food and entertainment. Facebook is pretty useful for that matter, and politicians might love it as it distracts us from their real agenda.

Yet, not when it is used as a tool for political propaganda. Many might not like the Government intervention, but can the market do it on its own?

What if the market takes care of itself?

Another possible scenario is just to let things go and let the market take care of itself. As companies, like Facebook, trade attention for profit. That attention is evaluated by time to time by businesses that trade it for dollars. For instance, if I buy a hundred clicks on Facebook, as a business owner I also measure its conversions and if and how much it’s worth. So willingly or not I’m creating a marketplace for attention.

So far Facebook has been pretty good in marketing its metrics (impressions, clicks, likes, and shares). Yet, what if businesses will soon realize those metrics aren’t good enough to justify a dedicated marketing budget?

What if people are taught what happens in the “business backend?”

Education (not schooling) is the critical ingredient for people’s freedom. On my own blog, I spend hours dissecting companies’ business models to understand what “motivates those companies.” I’ve been surprised in the last two years to see how many people don’t have an idea of how the companies that influence their daily lives make money.

It’s almost like taking medicine from a doctor, to realize after you’ve become addicted, that person wasn’t a doctor but a drug dealer which in the process of making you an addict has become a millionaire. How would you react to that?

FAANG business models:

How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
How Amazon Makes Money: Amazon Business Model in a Nutshell
The Trillion Dollar Company: Apple Business Model In A Nutshell
How Does Netflix Make Money? Netflix Business Model Explained
How Does Google Make Money? It’s Not Just Advertising!

Tools and resources:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
What Is a Business Model Canvas? Business Model Canvas Explained
Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
What Is Business Development? The Complete Guide To Business Development

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